ECON231 Lecture Notes - Lecture 5: Eurodollar, Federal Reserve System, Aggregate Demand

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blackgoose62

19 Apr 2018

School

University of Waterloo

Department

Economics

Course

ECON231

Professor

Jean Forand

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Document Summary

Chapter 15 money, interest rates & exchange rates. Liquid asset easily used to pay for goods/services or to repay debt without substantial transaction costs (earn little to no interest) Illiquid asset require substantial transaction costs in terms of time, effort, or fees to convert them to funds or payment (earn a higher interest rate or rate of return compared to monetary assets) Money supply controlled by central bank, the money that circulates in an economy. In us, central bank is called federal reserve system directly regulates the amount of currency in circulation & indirectly influences the amount of checking deposits, debit card accounts & other monetary assets. Money demand represents amount of monetary assets that people are willing to hole (instead of illiquid assets) Interest rates/expected rate of return: higher interest rate = higher opportunity cost of holding monetary assets = decreases demand for money ( ad)

Related Questions

Multiple choices

1. Banks face liquidity risk because

A) they can have difficulty meeting their depositor's demands to withdraw money.

B) they are unable to borrow from the Federal Reserve.

C) households and businesses may seek to borrow a large number of funds in a short period of time.

D) governments tend to run high budget deficits.

2. The original intention of the Fed's role as lender of last resort was to make loans to banks that were

A) not illiquid nor insolvent.

B) illiquid, but not insolvent.

C) insolvent, but not illiquid.

D) both illiquid and insolvent.

3. Why might a nation seek to maintain a pegged exchange rate?

A) It makes business planning easier for firms involved in the global economy.

B) It removes the need to intervene in the foreign exchange market.

C) It ensures that the exchange rate will remain at its equilibrium.

D) It makes their currency more attractive on the foreign exchange market.

4. Suppose a country pegs its currency. If investors start to believe the peg will collapse and the currency is going to depreciate, as the government defends the peg the interest rate will

A) Not move as interest rates must remain constant in a peg

B) Increase to maintain the peg

C) Decrease to maintain the peg

D) It depends on the inflation rate is low or high compared to the country to which the currency is pegged.

5. When the Fed extends loans to depository institutions

A) increases the level of reserves.

B) it decreases the level of reserves.

C) it reduces the total value of the assets on its balance sheet.

D) it reduces the total value of the liabilities on its balance sheet.

6. If the Fed buys securities worth $10 million, then

A) bank reserves will increase by $10 million.

B) bank reserves will decrease by $10 million.

C) currency in circulation will increase by $10 million.

D) bank holdings of securities increased by $10 million.

7. If the Fed purchases $1 million in securities from the nonbank public, the monetary base will rise by $1 million

A) if the public holds the proceeds as currency.

B) if the public deposits the proceeds as checkable deposits.

C) if the public deposits the proceeds with the Treasury in a monetary base account.

D) whether the public holds the proceeds as currency or deposits them as checkable deposits.

8. The aggregate M1 consists of

A) currency plus all deposits in financial institutions.

B) currency plus savings deposits in financial institutions.

C) currency plus checkable deposits in financial institutions.

D) currency.

9. If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%, by how much will deposits increase (assuming no change in excess reserves or the public's currency holdings)?

A) rise by $1 million

B) decline by $1 million

C) rise by $8 million

D) rise by $12.5 million

10. Suppose the required reserve ratio is 8% and the Fed purchases $100 million worth of Treasury bills from Wells Fargo. Suppose Wells Fargo didn't have excess reserves, then by how much is Wells Fargo able to increase its loans?

A) $8 million

B) $92 million

C) $100 million

D) $1.25 billion

11. If banks hold no excess reserves, checkable deposits total $1.5 billion, currency totals $400 million, and the required reserve ratio is 10%, then the monetary base equals

A) $550 million.

B) $1.54 billion.

C) $1.9 billion

D) $15 billion.

ultramarinehornet6

1. The market in which loans are bought and sold is called the:

		loan market.
		money market.
		secondary loan market.
		primary loan market.

2. Which of the following is omitted in a barter transaction?

		trade
		medium of exchange
		store of value
		money

3. If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________________ will be satisfied.

		balance of trade
		double coincidence of wants
		convenience of exchange
		division of labour

4. If loans become far less available, then sectors of the economy that ______________ like business investment, home construction, and car manufacturing can be dealt a crushing blow.

		depend on borrowed money
		typically generate extraordinary gains
		make loans to financial capital markets
		failed to diversify risk

5. Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at the market value of $400 million, what will its total assets equal?

		$110 million
		$710 million
		$480 million
		$510 million

6. Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

		medium of exchange
		unit of account
		store of value
		unit of exchange

7.Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

		savings
		money
		M2
		M1

8. Which of the following institutions determines the quantity of money in the economy as its most important task?

		U.S. Department of the Treasury
		Federal Open Market Committee
		Central Bank
		Federal Reserve Board of Governors

9. How are the specific interest rates for the lending and borrowing markets determined?

		U.S. Treasury Department Board policy
		by the forces of supply and demand
		through open market operations
		by altering the discount rate

10.When the central bank lowers the reserve requirement on deposits:

		the money supply increases and interest rates decrease.
		the money supply and interest rates decrease.
		the money supply and interest rates increase.
		the money supply decreases and interest rates increase.

taupeant891

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True

False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.

paying overtime to employees operating the machines.

operating when complementary services like transporters are unavailable or more expensive.

All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.

decreases.

remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.

the number of job openings divided by the number of workers in the labor force.

the ratio of open jobs to filled jobs.

the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True

False

Question 6

A decrease in workersâ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.

lower the job finding rate and the expected duration of unemployment.

raise the job finding rate and lower the expected duration of unemployment.

raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

zero.

fixed.

Question 8

If the interest rate increases, the real demand for money also increases

True

False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.

it is legal tender.

the government says so.

All of the above.

Question 10

High-powered money is

money held by business for investment.

total currency in circulation plus depository institution deposits at the Fed.

total currency in circulation.

government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.

checkable deposits.

travelerâs checks.

All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.

savings deposits, small time deposits, and private bonds.

checkable deposits, savings deposits, and small time deposits.

retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.

money has intrinsic value.

money is a better long term store of value.

All of the above.

Question

If a personâs income doubles, we expect their cash holdings to

Question 15

Real money demand does not change when

nominal GDP changes.

the interest rate changes.

the price level changes.

All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True

False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.

money demand increases and the price level decreases.

the money supply and the price level would increase.

the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True

False

Question 19

The real return on money is zero.

True

False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

-1%

1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.

the nominal interest rate rises.

real money balances are declining.

All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.

an increase in money demand.

a decrease in the price level.

All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.

an increase in money demand.

an increase in the price level.

All of the above.

Question 24

Under price level targeting the money supply becomes

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True

False

ECON231 Lecture Notes - Lecture 5: Eurodollar, Federal Reserve System, Aggregate Demand

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